Pembridge Resources (LSE:PERE) plans to make its much-anticipated return to trading on the London market later this month following a planned $40m fundraise to support its acquisition of the Minto mine in Canada. The company is currently on the road in support of the placing, hot on the heels of announcing a significant offtake agreement for the mine with a Japanese trading house, which will see it receive $30m in pre-payment plus another $30 million in working capital. Here, chief executive David Linsley tells us why he believes Minto’s prospects and the healthy state of the global copper market make Pembridge’s placing a great value opportunity for investors.
Formerly a cash shell, Pembridge announced its $37.5m purchase of the Minto mine from Capstone Mining in February, delivering on its promise to acquire a mining project where management could add value. Capstone, listed on the Toronto Stock Exchange, will also be granted a 9.9pc stake in Pembridge as part of the deal.
Minto is underground copper-gold-silver mine located in the Yukon region of Canada with a 10-year production history and all critical infrastructure, facilities and operating teams in place. Capstone’ current mine plan for Minto supports operations to 2021 with a large total resource base of 23Mt at 1.42pc copper, containing 708Mlbs. Capstone’s plans anticipated production of 15,000t (33Mlbs) of copper in concentrate with gold and silver by-products.
Key agreement
Last month saw Pembridge announce that it had signed heads of terms with a ‘leading global Japanese trading house’ for a major offtake agreement. Under this agreement, the un-named Japanese firm will be granted three-year exclusivity to buy copper concentrate from Minto up to a maximum of 125,000 tonnes. To secure the deal, the trading house has agreed to pay Pembridge US$30m in cash as an up-front partial pre-payment plus a working capital facility for another $30 million. Linsley tells us there had been a lot of third-party interest in Minto throughout the months leading up to the agreement:
Minto produces a high-quality concentrate, meaning we had strong demand for an offtake agreement. We ran a competitive process that saw us receive offers from a number of traders, but we decided to go with the Japanese trading house.’
Minto has averaged around $100m per annum in revenue from its copper production over the last three years. On this basis, the $30m pre-payment corresponds to roughly four months of production, and over the three-year offtake, one might expect Pembridge to receive in the order of $300m in total revenue.
Importantly, the agreement allows Pembridge to sell concentrate from Minto at the mine gate. Minto is on the West side of the Yukon River which means that for approximately 6 weeks, twice a year, it isn’t possible to ship concentrate from the site while the river alternately freezes and thaws. This is a subtle but critical point, as it means that Pembridge will continue to receive revenue even when the concentrate has to wait before shipment at the port of Skagway. Historically, Capstone has had to keep a substantial working capital reserve was required to cover the production of any concentrate during this period. As Linsley put it to us:
‘What we have managed to do with our partner is to be paid at the mine gate, which eliminates the working capital problems that one might have. I think shows that we have taken the time and effort to fundamentally change how things have been done in the past for the better.’
The two firms have also agreed a strategic alliance that will see them work together on Pembridge’s planned further development of the Minto site and its ongoing expansion in the Yukon. The details of this alliance are yet to be specified but could hint at future financing options. If Pembridge can use the Japanese trading house as a cornerstone financier, then it is less likely to have to dilute shareholder as it expands.
‘We have plans to do a lot of work in the region, so to have a strategic partner is great. We wanted to get that done and put away before we started the equity roadshow so the markets could see that some serious groups have done a lot of due diligence on the project, like it, and are backing it,’ Linsley told us.
On the road
Since announcing the offtake agreement, Pembridge has also launched a roadshow to secure some $40m to support the acquisition of Minto. Management, board of directors and connected parties will contribute at least $5m towards the placing, which is due to take place this month.
Pembridge has also convened a general meeting and prepared a prospectus for the placing to re-admit its shares for trading on the official list of the LSE by the end of July. It saw its shares suspended upon announcing the deal in February because the terms constituted a reverse takeover. Investors have been eagerly awaiting the company readmission price ever since.
Post acquisition, Pembridge plans to get to work with doubling Minto’s four-year mine life. The immediate focus, starting in Q3 this year, shall be on converting the existing 23Mt global resource base into reserves, with a US$4.1m in-fill drilling programme. In addition, it has identified multiple untested targets at depth that shall be targeted with a US$4.7m step out exploration programme.
There are also a number of initiatives targeted at reducing cash costs, with studies on optimising the underground mining method, as well as the crushing circuit, which could remove up to $10m in annual costs. Finally, it will spend $2m on mill automation and building its workforce to boost recoveries. Linsley told us that these developments are likely to be positive catalysts for Pembridge’s shares once trading has resumed:
‘The money from the agreement and the money raised goes into the general pool where it can go towards anything from the acquisition to our working capital or exploration budget. We are already doing a lot of work at Minto, with plenty more in the works. We have a strong exploration programme on the cards, and I think you will see a lot of news coming out. This delivery is important because you can’t just raise money and then go dark. There will be news as we make the changes we want to make, explore, do the infill drilling to increase the mine life. There is a lot to come.’
Value opportunity
So why should investors get involved in the upcoming placing? Linsley tells us the primary reason is that the company looks ‘very, very cheap’ at its placing price, given Minto’s prospects.
As can be seen in the chart below, Pembridge’s purchase price multiple for Minto looks cheap against 2017 EBITDA and forecast 2018 EBITDA when compared to peers. Using its $37.5m acquisition price for Minto, Pembridge says it has paid just $0.06 for each lb of the mine’s total copper resource, comfortably below the average paid by similar players.
Additionally, as we have previously pointed out, Capstone’s existing plan for Minto supports annual production of 18,000 tonnes of copper with gold and silver as by-products. In 2017, the mine produced 16,332 tonnes of copper and production guidance from Capstone for 2018 is 15,000 tonnes, with all-in sustaining costs of $2.55 to $2.65 per lb. At current copper prices of around $3/lb and costs of $2.65, 15,000 tonnes of production would generate a profit of roughly $14.7m (£11.2m). (15,000 tonnes = 33,069,339lbs) ((33,069,339 X (3.00 – 2.65)) = $11,574,269).
As Linsley put it to us: ‘We are going out at a very low level compared to our peers. Investors have the opportunity to invest in an operating, permitted, cash-flow producing asset in a safe jurisdiction. This isn’t like many other exploration plays, where investors hand over their cash with the hope of management finding something. There are not many other – or indeed any – offers like this on the London market.’
Copper opportunity
Beyond Minto’s merits, healthy global copper market conditions at present mean Pembridge could not have picked a much better time to resume trading. Despite a recent dip, copper prices continue to be boosted by industrial unrest at BHP’s giant Escondida mine in Chile. Steady growth in global demand for the metal, which is essential to all things electrical from air conditioning units to electric vehicles, has also helped. There is a shortage of new copper projects to meet this projected demand and, as a result, the London market is somewhat starved of listed copper plays.
Linsley explains: ‘Copper is a bellwether commodity. I think it is extremely cheap at current levels. Pretty much everyone I have spoken to who studies the market agrees that we are going into a solid phase, so we should see some healthy gains from here. If people want to dabble in that market, then I would say that now is exactly the right time to do it.’
Away from the diversified majors such as BHP, options are limited to a small number of mid-tiers (notably the two Kazakhstan-focused producers Kaz Minerals (KAZ, £4.5bn market cap) and Central Asia Metals (LSE:CAML, £500m), and new Spanish producer Atalaya (LSE:ATYM, £350m). Exploration and development plays include Georgian Mining (LSE:GEO, £12m), Metal Tiger (LSE:MTR, £30m) and AIM darling Asiamet Resources (LSE:ARS, £113m).
Alongside these established copper names Pembridge is the new kid on the copper block, led by president and industry veteran Peter Bojtos, who will be familiar to many as the chairman of Asiamet Resources until 2013, and, of course, Linsley, formerly of global mining advisory firm Behre Dolbear. In addition, Pembridge’s chairman is Frank McAllister, former CEO and chairman of Stillwater Mining and former CEO and chairman of ASARCO.
Time to buy?
So far, Pembridge has done precisely what it has said on the tin, purchasing in Minto a mine that already has infrastructure in place and can develop through investment in exploration and efficiency. Alongside this, the company boasts a seasoned management team and is operating in a copper market that looks well primed for further gains.
Pembridge’s ability to secure such favourable terms for its offtake agreement demonstrates a great deal of promise and is no doubt a major coup for a cash shell with a sub-£3m market cap. With that in mind, its placing price could represent a decent opportunity to get involved right at the get-go.
